• The recent study by the US Treasury reveals that introducing central bank digital currency (CBDC) could potentially destabilize the banking sector, while also having potential to boost household welfare.
• Banks may face increased competition from CBDCs, resulting in reduced equity for them, but households may benefit slightly from increased competition.
• Introducing CBDC may also decrease financial system volatility and asset price volatility.
Introduction of Central Bank Digital Currency
Recently, the United States Treasury conducted a study on the impact of introducing central bank digital currency (CBDC). The results revealed that its introduction could potentially destabilize the banking sector while also having the potential to boost household welfare. However, this suggestion was met with dissatisfaction among US lawmakers as they noted that the Federal Reserve has no authority to develop and issue such currencies due to privacy concerns of digital asset investors.
Impact Of CBDC On Banks
According to the Office of Financial Research’s study, introducing a CBDC or stablecoin into an economy can create competition between digital currency and bank deposits which can result in banks increasing their deposit interest rates in order to reduce financing spreads between deposit and lending activities. This would subsequently lead to a credit crunch and increased systemic risk for banks as their equity levels are reduced due to higher rates on deposits.
Benefits To Households
The research noted that there is potential for households to benefit slightly from this increased competition between digital currency and banks with an estimated gain of up to 2%. It further suggested that this benefit might be short-lived if competition favors digital currency as households will face financial instability.
Decrease In Systematic Volatility
The research also concluded that integrating CBDC into an economy may lead to a decrease in systematic volatility due to decreased asset price volatility alongside it. This offers a great opportunity for stabilizing markets amidst current economic conditions.
The study by the US Treasury provides insight into how introducing central bank digital currencies can have both positive and negative effects on different sectors within an economy depending on certain factors such as competition between digital currency and banks etc., Nonetheless more research needs be done before any concrete decisions can be made regarding its integration into economies worldwide.